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Economist at UOB Group Enrico Tanuwidjaja and Haris Handy assess the latest interest rate decision by the Bank Indonesia (BI).

Key Quotes

“Bank Indonesia (BI) cut its benchmark rate by 25bps to an all-time low of 3.50% at its February 2021 monetary policy meeting (MPC) as it sought to support the COVID-19 hit economy… Consequently, BI lowered the Deposit Facility rate to 2.75%, as well as the Lending Facility rate to 4.25%. BI stated that the decision is in line with low inflation expectation, anchored external stability, and the continued need to stimulate momentum for national economic recovery.”

“During the rate cut announcement, the central bank also downgraded its growth outlook to 4.3% – 5.3% this year (down from previous forecast of 4.8% to 5.8%); noting a weaker than expected 4Q20 growth and concerns that COVID-19 case resurgence could slow economic recovery further.”

“Additionally, global commodity prices have been rising of late, putting inherent pressure on inflation somewhat. Growth is also expected to recover faster in 2Q21 onwards. Finally, as we expect import growth to return into positive territory along with growth recovery, US dollars demand will likely be higher. This will need to be balanced in the short term with the portfolio capital inflows, as such requiring adequate yield differential to remain attractively in place.”

“Given all those factors, we continue to reaffirm our view that February MPC rate cut is likely to mark the end of the rate cut cycle by BI. We keep our BI rate forecast to remain steady at 3.50% for the rest of the year 2021. BI will remain accommodative and also ensuring ample liquidity to remain as long as it is necessary to support the process and progress of Indonesia’s economic recovery.”

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